Policy paper

Income Tax: debt traded on a multilateral trading facility

Published 13 September 2017

Who is likely to be affected

UK companies issuing debt admitted to trading on a multilateral trading facility (MTF) operated by a recognised stock exchange (RSE) regulated in the European Economic Area (EEA).

General description of the measure

The measure removes the requirement to withhold tax on interest for debt issued on an MTF operated by an EEA-regulated RSE by extending an existing exemption.

The measure also widens the definition of alternative finance investment bonds (AFIB) - these are Shari’a-compliant financial instruments also known as ‘sukuk’ - to include securities admitted to trading on such an MTF. Under tax rules, such issues are treated as debt, and the return on them as interest for certain tax purposes.

Policy objective

There has been a decline in the use of the UK as a trading venue for corporate debt since 2009. Against that background, the UK Debt Market Forum, set up by the Financial Conduct Authority in 2015, identified a need to improve the competitiveness of UK MTFs as alternatives to traditional debt markets.

It has become clear that current requirements to withhold tax on interest are a barrier to the establishment of MTFs in the UK. This is because debt traded on a UK MTF can’t currently benefit from an existing exemption from withholding requirements - the Quoted Eurobond Exemption (QEE) - while similar debt traded on some overseas MTFs can do so. This means that UK MTFs suffer a competitive disadvantage, making them commercially unattractive.

This measure ensures that UK debt markets can compete internationally on an equal footing by ending the anomaly which leads UK companies to issue debt on overseas venues in order to benefit from an existing UK exemption from withholding tax on interest.

Background to the measure

At Spring Budget 2017, the government announced its intention to exempt interest on debt traded on MTFs from withholding, in order to make UK wholesale debt markets (that is, those focused on institutional investors) more competitive.

The government also announced a consultation on the detailed implementation of the change. The consultation started on 20 March 2017 and ended on 12 June 2017.

In addition, following the consultation the government intends to widen the definition of AFIBs in tax legislation to include securities admitted to trading on an MTF regulated in the EEA. This means that such instruments will now qualify for the QEE and removes a potential obstacle to the use of UK venues for the issue and trading of AFIBs.

Detailed proposal

Operative date

In relation to the amendments to the meaning of ‘quoted Eurobond’ the measure will have effect for payments of interest made on or after 1 April 2018.

Amendments in relation to AFIBs will have effect for corporation tax purposes for accounting periods beginning on or after 1 April 2018, and for Income Tax purposes for the tax year 2018 to 2019 and subsequent tax years.

Current law

Current law providing the definition of ‘quoted Eurobonds’ is at section 987 of Income Tax Act 2007 (ITA 2007).

Current law providing the definition of ‘investment bond arrangements’ (that is, AFIBs) is at section 151N of Taxation of Chargeable Gains Act (TCGA) 1992, section 564G of ITA 2007 and section 507 of Corporation Tax Act 2009 (CTA 2009).

Current law providing the definition of ‘recognised stock exchanges’ is at section 1005 ITA 2007.

Proposed revisions

Legislation will be introduced in Winter Finance Bill 2017 to amend section 987 of ITA 2007 (meaning of ‘quoted Eurobond’) so that the definition of a quoted Eurobond is extended to include securities admitted to trading on a MTF operated by an EEA-regulated RSE.

The legislation similarly amends the definition of ‘investment bond arrangements’ in section 151N of Taxation of Capital Gains Act 1992, section 564G of ITA and section 507 of CTA 2009.

Summary of impacts

Exchequer impact (£m)

2017 to 2018 2018 to 2019 2019 to 2020 2020 to 2021 2021 to 2022 2022 to 2023
- nil nil nil nil nil

This measure is not expected to have an Exchequer impact.

Economic impact

This measure is not expected to have any significant macroeconomic impacts. However there will be a behavioural impact as debt is moved from overseas MTFs to UK MTFs.

Impact on individuals, households and families

The measure is not expected to impact on individuals, households or on family formation, stability or breakdown.

Equalities impacts

This measure is expected to have negligible equalities impacts.

Impact on business including civil society organisations

This measure will impact on all UK companies who trade debt on an MTF operated by an EEA-regulated recognised stock exchange. These companies will now benefit from an existing UK exemption from withholding tax on interest if debt is listed on a UK-based MTF.

This measure ensures that UK debt markets can compete internationally on an equal footing by ending the anomaly which leads UK companies to issue debt on overseas venues in order to obtain this exemption. This measure is expected to have a negligible impact on businesses administrative burdens. One-off costs may include familiarisation with the new rules. It is not expected there will be any on-going costs.

There is no impact on civil society organisations.

Operational impact (£m) (HM Revenue and Customs or other)

This measure is expected to have negligible operational impacts.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

The measure will be kept under review through communication with affected taxpayer groups.

Further advice

If you have any questions about this change, please contact:

Mark Lafone
Email: mark.lafone@hmrc.gsi.gov.uk
Telephone: 03000 585 613

Declaration

Mel Stride MP, Financial Secretary to the Treasury, has read this tax information and impact note and is satisfied that, given the available evidence, it represents a reasonable view of the likely costs, benefits and impacts of the measure.